An interesting reference to investing in the context of poker appeared recently in the Toronto Sun in the regular piece about “the Poker Dude” entitled “Welcome to the evil world of the bad beat“.
The article goes into some detail about bad beats in poker. For the uninitiated a bad beat is where you have a great hand and it is beaten in outrageous fashion by a much worse hand that flukes the cards out of left field.
The article describes how every player has their bad beat stories – particularly bad players. Sounds familiar in the investing world where everyone has the story about the great trade they made which then busted out after being up 100%.
But it has an interesting example, which is not really correct. The bad beat example in question is investing in Enron the day before “it hit the newspapers” about the massive fraud. However, this is not a bad beat. As stated earlier, a bad beat is where you have a great hand to start with and through the game, and then a poor hand defeats you out of nowhere.
Enron was not a good hand to start with. It was an awful hand. But for the people who didn’t know their investing research (and that was most investors at the time) it seemed like a great hand. So really, Enron was only a bad beat if you didn’t know what you were doing (and most investors at the time didn’t!).
So the main takes from this are (a) you have to be careful when using poker analogies to investing – they don’t always work, and (b) a bad beat is only truly a bad beat if you lost with a real good hand, not one that you thought was good.
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